Notes to Consolidated Financial Statements
(Unaudited)
Note A – Basis of Presentation
VF Corporation (together with its subsidiaries, collectively known as “VF” or “the Company”) uses a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to periods ended
September 2017
,
December 2016
and
September 2016
relate to the fiscal periods ended on
September 30, 2017
,
December 31, 2016
and
October 1, 2016
, respectively. During the first quarter of 2017, the Company approved a change in fiscal year end to the Saturday closest to March 31 from the Saturday closest to December 31. Accordingly, the Company’s 2017 fiscal year will end as planned on December 30, 2017, followed by a three-month transition period from December 31, 2017 through March 31, 2018. The Company’s next fiscal year will run from April 1, 2018 through March 30, 2019 (“fiscal 2019”).
On April 28, 2017, VF completed the sale of its Licensed Sports Group (“LSG”) business. As a result, VF reported the operating results for this business in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for all periods presented. In addition, the related assets and liabilities have been reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets through the date of sale. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business and has included the
JanSport
®
brand collegiate business as discontinued operations in our Consolidated Statements of Income and Consolidated Balance Sheets for all periods presented.
In addition, VF completed the sale of its Contemporary Brands coalition on August 26, 2016, and has reported the operating results for this business in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three and nine months ended September 2016. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note C for additional information on discontinued operations.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. Similarly, the
December 2016
condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations and cash flows of VF for the interim periods presented. Operating results for the
three and nine
months ended
September 2017
are not necessarily indicative of results that may be expected for any other interim period or for the year ending
December 30, 2017
. For further information, refer to the consolidated financial statements and notes included in VF’s Annual Report on Form 10-K for the year ended
December 2016
(“
2016
Form 10-K”).
Note B – Acquisition
On August 11, 2017, VF entered into a definitive merger agreement to acquire
100%
of the outstanding shares of Williamson-Dickie Mfg. Co. (“Williamson-Dickie”). The acquisition was completed on October 2, 2017 for
$800.7 million
in cash, subject to working capital and other adjustments. The purchase price was primarily funded with short-term borrowings. Williamson-Dickie is a privately held company based in Ft. Worth, TX, and is one of the largest companies in the workwear sector with a portfolio of brands including
Dickies
®
,
Workrite
®
,
Kodiak
®
,
Terra
®
and
Walls
®
. The Company believes the acquisition brings together complementary assets and capabilities, and creates a workwear business that will now serve an even broader set of consumers and industries around the world. The Company is still in the process of aligning accounting policies and valuing the assets acquired and liabilities assumed, and as such, certain disclosures regarding this transaction have not been included herein.
The Company recognized
$4.9 million
of transaction and deal-related expenses in the three and nine months ended September 2017.
Note C – Discontinued Operations
The Company continuously assesses the composition of our portfolio to ensure it is aligned with our strategic objectives and positioned to maximize growth and return to our shareholders.
Divestiture of the Licensing Business
On April 28, 2017, VF completed the sale of LSG to Fanatics, Inc. The Company received net proceeds of
$213.5 million
and recorded an after-tax loss on sale of
$4.1 million
, which is included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for the first nine months of 2017. The final adjustment to the after-tax loss on sale was
$0.3 million
in the third quarter of 2017.
LSG included the
Majestic
®
brand, which supplied apparel and fanware through licensing agreements with U.S. and international professional sports leagues and teams, and was previously included within our Imagewear coalition. Under the terms of the transition services agreement, the Company is providing certain support services for periods ranging from
three
to
24
months from the closing date of the transaction. Revenue and expense items associated with the transition services are primarily recorded in the Imagewear coalition.
Beginning in the first quarter of 2017, VF reported the results of LSG in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income; accordingly, the results have been excluded from continuing operations and segment results for all periods presented. The LSG results, including the loss on sale, recorded in the income (loss) from discontinued operations, net of tax line item were income of
$0.3 million
and losses of
$4.6 million
for the
third
quarter and first nine months of
2017
, respectively, and income of
$18.1 million
and
$45.1 million
for the third quarter and first nine months of 2016, respectively. Prior to the sale, the related assets and liabilities of LSG were reported as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.
In conjunction with the LSG divestiture, VF executed its plan to entirely exit all of its licensing businesses, and has classified the assets of the
JanSport
®
brand collegiate business as held-for-sale in VF’s Consolidated Balance Sheets for all periods presented. The assets of the
JanSport
®
brand collegiate business are recorded at their fair value of
$0.3 million
at September 2017.
Management determined that the expected sale of the
JanSport
®
brand collegiate business met the criteria for presentation as discontinued operations in the first quarter of 2017. Accordingly, the results of the
JanSport
®
brand collegiate business have been presented as discontinued operations in VF’s Consolidated Statements of Income beginning in the first quarter of 2017, and thus have been excluded from continuing operations and segment results for all periods presented. The
JanSport
®
brand collegiate results, including the estimated loss on sale, recorded in the income (loss) from discontinued operations, net of tax line item were losses of
$0.9 million
and
$6.5 million
for the
third
quarter and first nine months of
2017
, respectively, and losses of
$0.3 million
and
$0.6 million
for the third quarter and first nine months of 2016, respectively. The
JanSport
®
brand collegiate business was previously included within our Outdoor & Action Sports coalition.
Certain corporate overhead and other costs previously allocated to the licensing business for segment reporting purposes do not qualify for classification within discontinued operations and have been reallocated to continuing operations.
Divestiture of the Contemporary Brands Coalition
On
August 26, 2016
, VF completed the sale of its Contemporary Brands coalition to Delta Galil Industries, Ltd. for
$116.9 million
. The Contemporary Brands coalition included the businesses of the
7 For All Mankind
®
,
Splendid
®
and
Ella Moss
®
brands (the “Businesses”) and was previously disclosed as a separate reportable segment of VF.
The transaction resulted in an after-tax loss on sale of
$104.4 million
which was included in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statements of Income for the first nine months of 2016. The after-tax loss on sale included in the income (loss) from discontinued operations, net of tax line item for the third quarter of 2016 was
$3.8 million
.
VF reported the results of the Businesses as discontinued operations for the third quarter and first nine months of 2016 and excluded them from continuing operations and segment results. The results of the Businesses, including the loss on sale, recorded in the income (loss) from discontinued operations, net of tax line item for the
third
quarter and first nine months of
2016
were losses of
$4.5 million
and
$98.4 million
, respectively.
VF provided certain support services under transition services agreements and completed these services during the third quarter of 2017. These services did not have a material impact on VF’s Consolidated Statement of Income for the nine months ended September 2017.
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items included in the income (loss) from discontinued operations for the divestitures of the licensing business and Contemporary Brands coalition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September
|
|
Nine Months Ended September
|
In thousands
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
$
|
6,498
|
|
|
$
|
203,696
|
|
|
$
|
160,323
|
|
|
$
|
603,651
|
|
Cost of goods sold
|
6,580
|
|
|
127,876
|
|
|
121,172
|
|
|
362,215
|
|
Selling, general and administrative expenses
|
1,341
|
|
|
51,714
|
|
|
36,059
|
|
|
173,574
|
|
Interest expense, net
|
(1
|
)
|
|
(21
|
)
|
|
(26
|
)
|
|
(183
|
)
|
Other income (expense), net
|
—
|
|
|
7
|
|
|
—
|
|
|
3
|
|
Income (loss) from discontinued operations before income taxes
|
(1,424
|
)
|
|
24,092
|
|
|
3,066
|
|
|
67,682
|
|
Gain (loss) on the sale of discontinued operations before income taxes
|
411
|
|
|
(4,439
|
)
|
|
(9,506
|
)
|
|
(154,275
|
)
|
Total income (loss) from discontinued operations before income taxes
|
(1,013
|
)
|
|
19,653
|
|
|
(6,440
|
)
|
|
(86,593
|
)
|
Income tax (expense) benefit
(a)
|
389
|
|
|
(6,388
|
)
|
|
(4,676
|
)
|
|
32,714
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
(624
|
)
|
|
$
|
13,265
|
|
|
$
|
(11,116
|
)
|
|
$
|
(53,879
|
)
|
|
|
(a)
|
Income tax (expense) benefit for the nine months ended September 2017 includes
$8.6 million
of deferred tax expense related to GAAP and tax basis differences for LSG.
|
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
September 2017
|
|
December 2016
|
|
September 2016
|
Accounts receivable, net
|
$
|
—
|
|
|
$
|
36,285
|
|
|
$
|
48,768
|
|
Inventories
|
—
|
|
|
98,025
|
|
|
102,450
|
|
Other current assets
|
—
|
|
|
1,535
|
|
|
2,009
|
|
Property, plant and equipment, net
|
315
|
|
|
13,640
|
|
|
14,297
|
|
Intangible assets
|
—
|
|
|
42,427
|
|
|
44,833
|
|
Goodwill
|
—
|
|
|
28,636
|
|
|
28,636
|
|
Other assets
|
—
|
|
|
692
|
|
|
770
|
|
Total assets of discontinued operations
(a)
|
$
|
315
|
|
|
$
|
221,240
|
|
|
$
|
241,763
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
21,674
|
|
|
$
|
15,318
|
|
Accrued liabilities
|
—
|
|
|
13,531
|
|
|
9,765
|
|
Other liabilities
|
—
|
|
|
791
|
|
|
801
|
|
Deferred income tax liabilities
(b)
|
—
|
|
|
(4,081
|
)
|
|
(4,140
|
)
|
Total liabilities of discontinued operations
(a)
|
$
|
—
|
|
|
$
|
31,915
|
|
|
$
|
21,744
|
|
|
|
(a)
|
Amounts at December 2016 and
September 2016
have been classified as current and long-term in the Consolidated Balance Sheets.
|
|
|
(b)
|
Deferred income tax balances reflect VF’s consolidated netting by jurisdiction.
|
The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. There were no significant capital expenditures and operating noncash items for any periods presented. Depreciation and amortization expense was
$3.0 million
and
$10.9 million
for the nine months ended September 2017 and 2016, respectively.
Note D – Sale of Accounts Receivable
VF has an agreement with a financial institution to sell selected trade accounts receivable on a recurring, nonrecourse basis. Under the agreement, up to
$367.5 million
of VF’s accounts receivable may be sold to the financial institution and remain outstanding at any point in time. VF removes the accounts receivable from the Consolidated Balance Sheets at the time of sale. VF does not retain any interests in the sold accounts receivable but continues to service and collect outstanding accounts receivable on behalf of the financial institution. During the first nine months of
2017
, VF sold total accounts receivable of
$871.6 million
. As of
September 2017
,
December 2016
and
September 2016
,
$191.4 million
,
$209.5 million
and
$212.3 million
, respectively, of the sold accounts receivable had been removed from the Consolidated Balance Sheets but remained outstanding with the financial institution. The funding fee charged by the financial institution is included in the other income (expense), net line item in the Consolidated Statements of Income, and was
$0.8 million
and
$2.7 million
for the
third
quarter and first
nine months
of 2017, respectively, and
$0.8 million
and
$2.5 million
for the
third
quarter and first
nine months
of
2016
, respectively. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.
Note E – Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
September 2017
|
|
December 2016
|
|
September 2016
|
Finished products
|
$
|
1,717,516
|
|
|
$
|
1,278,504
|
|
|
$
|
1,706,612
|
|
Work-in-process
|
106,120
|
|
|
97,725
|
|
|
96,727
|
|
Raw materials
|
85,927
|
|
|
95,071
|
|
|
94,207
|
|
Total inventories
|
$
|
1,909,563
|
|
|
$
|
1,471,300
|
|
|
$
|
1,897,546
|
|
Note F – Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2017
|
|
December 2016
|
In thousands
|
|
Weighted
Average
Amortization
Period
|
|
Amortization
Method
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Net
Carrying
Amount
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
20 years
|
|
Accelerated
|
|
$
|
265,725
|
|
|
$
|
134,246
|
|
|
$
|
131,479
|
|
|
$
|
128,422
|
|
License agreements
|
|
28 years
|
|
Accelerated
|
|
109,370
|
|
|
62,278
|
|
|
47,092
|
|
|
49,682
|
|
Trademark
|
|
16 years
|
|
Straight-line
|
|
58,132
|
|
|
6,358
|
|
|
51,774
|
|
|
54,499
|
|
Other
|
|
9 years
|
|
Straight-line
|
|
9,658
|
|
|
3,846
|
|
|
5,812
|
|
|
3,297
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
|
|
236,157
|
|
|
235,900
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
1,700,365
|
|
|
1,561,371
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
$
|
1,936,522
|
|
|
$
|
1,797,271
|
|
Amortization expense for the
third
quarter and first
nine months
of
2017
was
$5.6 million
and
$16.3 million
, respectively. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five 12-month periods beginning in
2017
is
$21.9 million
,
$21.9 million
,
$21.3 million
,
$20.4 million
and
$19.4 million
, respectively.
Note G – Goodwill
Changes in goodwill are summarized by business segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Outdoor &
Action Sports
|
|
Jeanswear
|
|
Imagewear
|
|
Sportswear
|
|
Total
|
Balance, December 2016
|
$
|
1,310,133
|
|
|
$
|
210,765
|
|
|
$
|
30,111
|
|
|
$
|
157,314
|
|
|
$
|
1,708,323
|
|
Impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
|
(104,651
|
)
|
|
(104,651
|
)
|
Currency translation
|
32,260
|
|
|
6,941
|
|
|
—
|
|
|
—
|
|
|
39,201
|
|
Balance, September 2017
|
$
|
1,342,393
|
|
|
$
|
217,706
|
|
|
$
|
30,111
|
|
|
$
|
52,663
|
|
|
$
|
1,642,873
|
|
During the third quarter of 2017, VF performed an interim impairment analysis of the
Nautica
®
reporting unit and recorded an impairment charge of
$104.7 million
.
Nautica
®
is part of the Sportswear coalition. Refer to Note N for additional information on fair value measurements.
As of September 2017, accumulated impairment charges for the Outdoor & Action Sports and Sportswear coalitions were
$82.7 million
and
$163.2 million
, respectively. As of December 2016, accumulated impairment charges for the Outdoor & Action Sports and Sportswear coalitions were
$82.7 million
and
$58.5 million
, respectively.
Note H – Pension Plans
The components of pension cost for VF’s defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September
|
|
Nine Months Ended September
|
In thousands
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost – benefits earned during the period
|
$
|
6,202
|
|
|
$
|
6,478
|
|
|
$
|
18,733
|
|
|
$
|
19,434
|
|
Interest cost on projected benefit obligations
|
14,730
|
|
|
16,991
|
|
|
44,254
|
|
|
51,066
|
|
Expected return on plan assets
|
(23,825
|
)
|
|
(24,869
|
)
|
|
(70,977
|
)
|
|
(74,714
|
)
|
Amortization of deferred amounts:
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
10,030
|
|
|
16,303
|
|
|
31,414
|
|
|
48,928
|
|
Deferred prior service costs
|
643
|
|
|
645
|
|
|
2,000
|
|
|
1,937
|
|
Net periodic pension cost
|
$
|
7,780
|
|
|
$
|
15,548
|
|
|
$
|
25,424
|
|
|
$
|
46,651
|
|
VF contributed
$7.8 million
to its defined benefit plans during the first
nine months
of
2017
, and intends to make approximately
$7.2 million
of additional contributions during the remainder of
2017
.
In conjunction with the sale of the licensing business, the Company recognized a
$1.1 million
pension curtailment loss in the income (loss) from discontinued operations, net of tax line item in the Consolidated Statement of Income in the first
nine months
of 2017.
Note I – Capital and Accumulated Other Comprehensive Loss
During the first
nine months
of
2017
, the Company purchased
22.2 million
shares of Common Stock in open market transactions for
$1.2 billion
under its share repurchase program authorized by VF’s Board of Directors. These transactions were treated as treasury stock transactions.
Common Stock outstanding is net of shares held in treasury which are, in substance, retired. During the first
nine months
of
2017
, VF restored
22.3 million
treasury shares to an unissued status, after which they were no longer recognized as shares held in treasury. There were
no
shares held in treasury at the end of
September 2017
or
December 2016
, and
2,600
shares held in treasury at the end of
September 2016
. The excess of the cost of treasury shares acquired over the
$0.25
per share stated value of Common Stock is deducted from retained earnings.
VF Common Stock is also held by the Company’s deferred compensation plans and is treated as treasury shares for financial reporting purposes. During the first
nine months
of
2017
, the Company purchased
6,540
shares of Common Stock in open market transactions for
$0.4 million
. Balances related to shares held for deferred compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except share amounts
|
September 2017
|
|
December 2016
|
|
September 2016
|
Shares held for deferred compensation plans
|
320,615
|
|
|
439,667
|
|
|
450,067
|
|
Cost of shares held for deferred compensation plans
|
$
|
3,973
|
|
|
$
|
5,464
|
|
|
$
|
5,434
|
|
Accumulated Other Comprehensive Loss
Comprehensive income consists of net income and specified components of other comprehensive income (“OCI”), which relates to changes in assets and liabilities that are not included in net income under GAAP but are instead deferred and accumulated within a separate component of stockholders’ equity in the balance sheet. VF’s comprehensive income is presented in the Consolidated Statements of Comprehensive Income. The deferred components of OCI are reported, net of related income taxes, in accumulated OCI in stockholders’ equity, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
September 2017
|
|
December 2016
|
|
September 2016
|
Foreign currency translation and other
|
$
|
(567,964
|
)
|
|
$
|
(794,579
|
)
|
|
$
|
(670,551
|
)
|
Defined benefit pension plans
|
(268,159
|
)
|
|
(302,697
|
)
|
|
(340,891
|
)
|
Derivative financial instruments
|
(78,773
|
)
|
|
55,813
|
|
|
13,422
|
|
Accumulated other comprehensive loss
|
$
|
(914,896
|
)
|
|
$
|
(1,041,463
|
)
|
|
$
|
(998,020
|
)
|
The changes in accumulated OCI, net of related taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 2017
|
In thousands
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, June 2017
|
$
|
(633,209
|
)
|
|
$
|
(275,089
|
)
|
|
$
|
(22,299
|
)
|
|
$
|
(930,597
|
)
|
Other comprehensive income (loss) before reclassifications
|
65,245
|
|
|
—
|
|
|
(51,826
|
)
|
|
13,419
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
6,930
|
|
|
(4,648
|
)
|
|
2,282
|
|
Net other comprehensive income (loss)
|
65,245
|
|
|
6,930
|
|
|
(56,474
|
)
|
|
15,701
|
|
Balance, September 2017
|
$
|
(567,964
|
)
|
|
$
|
(268,159
|
)
|
|
$
|
(78,773
|
)
|
|
$
|
(914,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 2016
|
In thousands
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, June 2016
|
$
|
(675,213
|
)
|
|
$
|
(351,298
|
)
|
|
$
|
25,056
|
|
|
$
|
(1,001,455
|
)
|
Other comprehensive income (loss) before reclassifications
|
4,662
|
|
|
—
|
|
|
5,896
|
|
|
10,558
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
10,407
|
|
|
(17,530
|
)
|
|
(7,123
|
)
|
Net other comprehensive income (loss)
|
4,662
|
|
|
10,407
|
|
|
(11,634
|
)
|
|
3,435
|
|
Balance, September 2016
|
$
|
(670,551
|
)
|
|
$
|
(340,891
|
)
|
|
$
|
13,422
|
|
|
$
|
(998,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 2017
|
In thousands
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, December 2016
|
$
|
(794,579
|
)
|
|
$
|
(302,697
|
)
|
|
$
|
55,813
|
|
|
$
|
(1,041,463
|
)
|
Other comprehensive income (loss) before reclassifications
|
226,615
|
|
|
12,253
|
|
|
(107,836
|
)
|
|
131,032
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
22,285
|
|
|
(26,750
|
)
|
|
(4,465
|
)
|
Net other comprehensive income (loss)
|
226,615
|
|
|
34,538
|
|
|
(134,586
|
)
|
|
126,567
|
|
Balance, September 2017
|
$
|
(567,964
|
)
|
|
$
|
(268,159
|
)
|
|
$
|
(78,773
|
)
|
|
$
|
(914,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 2016
|
In thousands
|
Foreign Currency Translation and Other
|
|
Defined Benefit Pension Plans
|
|
Derivative Financial Instruments
|
|
Total
|
Balance, December 2015
|
$
|
(718,169
|
)
|
|
$
|
(372,195
|
)
|
|
$
|
47,142
|
|
|
$
|
(1,043,222
|
)
|
Other comprehensive income (loss) before reclassifications
|
47,618
|
|
|
—
|
|
|
20,331
|
|
|
67,949
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
31,304
|
|
|
(54,051
|
)
|
|
(22,747
|
)
|
Net other comprehensive income (loss)
|
47,618
|
|
|
31,304
|
|
|
(33,720
|
)
|
|
45,202
|
|
Balance, September 2016
|
$
|
(670,551
|
)
|
|
$
|
(340,891
|
)
|
|
$
|
13,422
|
|
|
$
|
(998,020
|
)
|
Reclassifications out of accumulated OCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Affected Line Item in the Consolidated Statements of Income
|
|
Three Months Ended September
|
|
Nine Months Ended September
|
Details About Accumulated Other Comprehensive Income (Loss) Components
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amortization of defined benefit pension plans:
|
|
|
|
|
|
|
|
|
Net deferred actuarial losses
|
|
(a)
|
|
$
|
(10,030
|
)
|
|
$
|
(16,303
|
)
|
|
$
|
(31,414
|
)
|
|
$
|
(48,928
|
)
|
Deferred prior service costs
|
|
(a)
|
|
(643
|
)
|
|
(645
|
)
|
|
(2,000
|
)
|
|
(1,937
|
)
|
Pension curtailment loss
|
|
Income (loss) from discontinued operations, net of tax
|
|
—
|
|
|
—
|
|
|
(1,105
|
)
|
|
—
|
|
|
|
Total before tax
|
|
(10,673
|
)
|
|
(16,948
|
)
|
|
(34,519
|
)
|
|
(50,865
|
)
|
|
|
Tax benefit
|
|
3,743
|
|
|
6,541
|
|
|
12,234
|
|
|
19,561
|
|
|
|
Net of tax
|
|
(6,930
|
)
|
|
(10,407
|
)
|
|
(22,285
|
)
|
|
(31,304
|
)
|
Gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Net sales
|
|
11,614
|
|
|
14,676
|
|
|
25,074
|
|
|
11,997
|
|
Foreign exchange contracts
|
|
Cost of goods sold
|
|
(4,164
|
)
|
|
15,485
|
|
|
12,763
|
|
|
80,094
|
|
Foreign exchange contracts
|
|
Selling, general and administrative expenses
|
|
(882
|
)
|
|
(1,098
|
)
|
|
(1,212
|
)
|
|
(3,611
|
)
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
(774
|
)
|
|
526
|
|
|
(688
|
)
|
|
2,653
|
|
Interest rate contracts
|
|
Interest expense
|
|
(1,185
|
)
|
|
(1,131
|
)
|
|
(3,518
|
)
|
|
(3,356
|
)
|
|
|
Total before tax
|
|
4,609
|
|
|
28,458
|
|
|
32,419
|
|
|
87,777
|
|
|
|
Tax benefit (expense)
|
|
39
|
|
|
(10,928
|
)
|
|
(5,669
|
)
|
|
(33,726
|
)
|
|
|
Net of tax
|
|
4,648
|
|
|
17,530
|
|
|
26,750
|
|
|
54,051
|
|
Total reclassifications for the period
|
|
Net of tax
|
|
$
|
(2,282
|
)
|
|
$
|
7,123
|
|
|
$
|
4,465
|
|
|
$
|
22,747
|
|
|
|
(a)
|
These accumulated OCI components are included in the computation of net periodic pension cost (refer to Note H for additional details).
|
Note J – Stock-based Compensation
During the first
nine months
of
2017
, VF granted stock options to employees and nonemployee members of VF’s Board of Directors to purchase
3,508,940
shares of its Common Stock at a weighted average exercise price of
$53.68
per share. The exercise price of each option granted was equal to the fair market value of VF Common Stock on the date of grant. Employee stock options vest in equal annual installments over
three years
. Stock options granted to nonemployee members of VF’s Board of Directors become exercisable
one year
from the date of grant. The grant date fair value of each option award is calculated using a lattice option-pricing valuation model, which incorporates a range of assumptions for inputs as follows:
|
|
|
|
2017
|
Expected volatility
|
23% to 30%
|
Weighted average expected volatility
|
24%
|
Expected term (in years)
|
6.3 to 7.7
|
Weighted average dividend yield
|
2.8%
|
Risk-free interest rate
|
0.7% to 2.4%
|
Weighted average fair value at date of grant
|
$9.90
|
Also during the first
nine months
of
2017
, VF granted
615,937
performance-based restricted stock units (“RSU”) to employees that enable them to receive shares of VF Common Stock at the end of a
three
-year period. Each performance-based RSU has a potential final payout ranging from
zero
to
two
shares of VF Common Stock. The number of shares earned by participants, if any, is based on achievement of a
three
-year baseline profitability goal and annually established performance goals set by the Compensation Committee of the Board of Directors. Shares are issued to participants in the year following the conclusion of each
three
-year performance period. The weighted average fair market value of VF Common Stock at the date the units were granted was
$53.69
per share.
The actual number of performance-based RSUs earned may also be adjusted upward or downward by
25%
of the target award, based on how VF’s total shareholder return (“TSR”) over the
three
-year period compares to the TSR for companies included in the Standard & Poor’s 500 Index. The grant date fair value of the TSR-based adjustment related to the
2017
performance-based RSU grants was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was
$2.67
per share.
VF granted
17,964
nonperformance-based RSUs to nonemployee members of the Board of Directors during the first quarter of
2017
. These units vest upon grant and will be settled in shares of VF Common Stock
one year
from the date of grant. The fair market value of VF Common Stock at the date the units were granted was
$53.47
per share.
VF granted
186,447
nonperformance-based RSUs to certain key employees in international jurisdictions during the first
nine months
of
2017
. These units vest over periods of up to
four years
from the date of grant and each unit entitles the holder to
one
share of VF Common Stock. The weighted average fair market value of VF Common Stock at the date the units were granted was
$57.70
.
VF granted
385,915
restricted shares of VF Common Stock to certain members of management during the first
nine months
of
2017
. These shares vest over periods of up to
five years
from the date of grant. The weighted average fair market value of VF Common Stock at the date the shares were granted was
$55.74
per share.
Note K – Income Taxes
The effective income tax rate for the first
nine months
of
2017
was
18.4%
compared to
17.9%
in the first
nine months
of
2016
. The first
nine months
of
2017
included a net discrete tax benefit of
$14.4 million
, which included a
$12.5 million
tax benefit related to stock compensation,
$4.1 million
of net tax benefits related to the realization of previously unrecognized tax benefits and interest, and
$1.9 million
of discrete tax expense related to the effects of tax rate changes. The
$14.4 million
net discrete tax benefit in 2017 reduced the effective income tax rate by
1.6%
. The first
nine months
of
2016
included a net discrete tax benefit of
$40.3 million
, which included a
$26.3 million
tax benefit related to the early adoption of the accounting standards update on stock compensation,
$15.6 million
of net tax benefits related to the realization of previously unrecognized tax benefits and interest, and
$4.1 million
of discrete tax expense related to the effects of tax rate changes. The
$40.3 million
net discrete tax benefit in
2016
reduced the effective income tax rate by
3.8%
. Without discrete items, the effective income tax rate for the first
nine months
of
2017
decreased by
1.7%
compared with the
2016
period primarily due to a higher percentage of income in lower tax rate jurisdictions and the impact of early adopting the accounting standards update regarding
intra-entity asset transfers, partially offset by the impact of goodwill impairment recorded in the quarter.
VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. In the U.S., the Internal Revenue Service (“IRS”) examinations for tax years through 2012 have been effectively settled. The examination of Timberland’s 2011 tax return is ongoing. The IRS has proposed material adjustments to Timberland’s 2011 tax return that would significantly impact the timing of cash tax payments and assessment of interest charges. The Company has formally disagreed with the proposed adjustments. During 2015, VF filed a petition to the U.S. Tax Court to begin the process of resolving this matter, but it has not yet reached a resolution. In addition, VF is currently subject to examination by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and has concluded that VF’s provision for income taxes is adequate. The outcome of any one examination is not expected to have a material impact on VF’s consolidated financial statements. Management believes that some of these audits and negotiations will conclude during the next
12 months
.
VF was granted a ruling which lowered the effective income tax rate on taxable earnings for years 2010 through 2014 under Belgium’s excess profit tax regime. In February 2015, the European Union Commission (“EU”) opened a state aid investigation into Belgium’s rulings. On January 11, 2016, the EU announced its decision that these rulings were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including VF. On March 22, 2016, the Belgium government filed an appeal seeking annulment of the EU decision. Additionally, on June 21, 2016, VF Europe BVBA filed its own application for annulment of the EU decision. Both of the listed requests for annulment remain open and unresolved.
On December 22, 2016, Belgium adopted a law which entitled the Belgium tax authorities to issue tax assessments, and demand timely payments from companies which benefited from the excess profits regime. On January 10, 2017, VF Europe BVBA received an assessment for
€31.9 million
tax and interest related to excess profits benefits received in prior years. VF Europe BVBA remitted
€31.9 million
(
$33.9 million
) on January 13, 2017, which was recorded as an income tax receivable based on the expected success of the aforementioned requests for annulment. If this matter is adversely resolved, these amounts will not be collected by VF.
During the first
nine months
of
2017
, the amount of net unrecognized tax benefits and associated interest increased by
$2.6 million
to
$153.1 million
. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits and interest may decrease during the next
12 months
by approximately
$19.1 million
related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which
$16.9 million
would reduce income tax expense.
Note L – Business Segment Information
VF’s businesses are grouped into product categories, and by brands within those product categories, for internal financial reporting used by management. These groupings of businesses within VF are referred to as “coalitions” and are the basis for VF’s reportable segments. Financial information for VF’s reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September
|
|
Nine Months Ended September
|
In thousands
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Coalition revenues:
|
|
|
|
|
|
|
|
Outdoor & Action Sports
|
$
|
2,502,590
|
|
|
$
|
2,326,436
|
|
|
$
|
5,647,587
|
|
|
$
|
5,378,272
|
|
Jeanswear
|
697,701
|
|
|
701,416
|
|
|
1,945,950
|
|
|
2,041,186
|
|
Imagewear
|
138,885
|
|
|
127,992
|
|
|
423,859
|
|
|
404,633
|
|
Sportswear
|
140,272
|
|
|
140,705
|
|
|
352,848
|
|
|
373,977
|
|
Other
|
29,370
|
|
|
31,167
|
|
|
79,832
|
|
|
84,531
|
|
Total coalition revenues
|
$
|
3,508,818
|
|
|
$
|
3,327,716
|
|
|
$
|
8,450,076
|
|
|
$
|
8,282,599
|
|
Coalition profit:
(a)
|
|
|
|
|
|
|
|
Outdoor & Action Sports
|
$
|
524,489
|
|
|
$
|
491,015
|
|
|
$
|
877,206
|
|
|
$
|
842,378
|
|
Jeanswear
|
121,218
|
|
|
142,427
|
|
|
323,994
|
|
|
388,564
|
|
Imagewear
|
22,377
|
|
|
23,981
|
|
|
72,349
|
|
|
74,497
|
|
Sportswear
|
17,488
|
|
|
15,080
|
|
|
27,764
|
|
|
26,156
|
|
Other
|
(737
|
)
|
|
(341
|
)
|
|
(3,225
|
)
|
|
(3,523
|
)
|
Total coalition profit
|
684,835
|
|
|
672,162
|
|
|
1,298,088
|
|
|
1,328,072
|
|
Impairment of goodwill
(b)
|
(104,651
|
)
|
|
—
|
|
|
(104,651
|
)
|
|
—
|
|
Corporate and other expenses
(a)
|
(96,567
|
)
|
|
(65,012
|
)
|
|
(252,044
|
)
|
|
(211,910
|
)
|
Interest expense, net
|
(22,537
|
)
|
|
(22,568
|
)
|
|
(63,332
|
)
|
|
(63,982
|
)
|
Income from continuing operations before income taxes
|
$
|
461,080
|
|
|
$
|
584,582
|
|
|
$
|
878,061
|
|
|
$
|
1,052,180
|
|
|
|
(a)
|
Certain corporate overhead and other costs of
$6.0 million
and
$18.2 million
for the
three and nine
-month periods ended September 2016, respectively, previously allocated to the Imagewear and Outdoor & Action Sports coalitions for segment reporting purposes, have been reallocated to continuing operations as discussed in Note C.
|
|
|
(b)
|
Represents goodwill impairment charge in 2017 related to the Sportswear coalition as discussed in Notes G and N. The impairment charge was excluded from the profit of the Sportswear coalition since it is not part of the ongoing operations of the business.
|
Note M – Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September
|
|
Nine Months Ended September
|
In thousands, except per share amounts
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Earnings per share – basic:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
386,764
|
|
|
$
|
485,224
|
|
|
$
|
716,308
|
|
|
$
|
863,652
|
|
Weighted average common shares outstanding
|
393,258
|
|
|
413,461
|
|
|
400,771
|
|
|
417,067
|
|
Earnings per share from continuing operations
|
$
|
0.98
|
|
|
$
|
1.17
|
|
|
$
|
1.79
|
|
|
$
|
2.07
|
|
Earnings per share – diluted:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
386,764
|
|
|
$
|
485,224
|
|
|
$
|
716,308
|
|
|
$
|
863,652
|
|
Weighted average common shares outstanding
|
393,258
|
|
|
413,461
|
|
|
400,771
|
|
|
417,067
|
|
Incremental shares from stock options and other dilutive securities
|
4,126
|
|
|
5,779
|
|
|
3,848
|
|
|
6,410
|
|
Adjusted weighted average common shares outstanding
|
397,384
|
|
|
419,240
|
|
|
404,619
|
|
|
423,477
|
|
Earnings per share from continuing operations
|
$
|
0.97
|
|
|
$
|
1.16
|
|
|
$
|
1.77
|
|
|
$
|
2.04
|
|
Outstanding options to purchase
4.9 million
and
8.6 million
shares of Common Stock were excluded from the calculations of diluted earnings per share for the
three and nine
-month periods ended
September 2017
, respectively, and options to purchase
5.2
million
and
5.3 million
shares were excluded from the calculations of diluted earnings per share for the
three and nine
-month periods ended
September 2016
, respectively, because the effect of their inclusion would have been antidilutive to those periods. In addition,
1.1 million
shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for both the
three and nine
-month periods ended
September 2017
, and
1.0 million
shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for both the
three and nine
-month periods ended
September 2016
because these units were not considered to be contingent outstanding shares in those periods.
Note N – Fair Value Measurements
Financial assets and financial liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.
|
|
|
•
|
Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be VF’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.
|
The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
Fair Value Measurement Using
(a)
|
In thousands
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
September 2017
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
405,045
|
|
|
$
|
405,045
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
8,307
|
|
|
8,307
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
26,658
|
|
|
—
|
|
|
26,658
|
|
|
—
|
|
Investment securities
|
202,721
|
|
|
189,744
|
|
|
12,977
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
89,212
|
|
|
—
|
|
|
89,212
|
|
|
—
|
|
Deferred compensation
|
233,151
|
|
|
—
|
|
|
233,151
|
|
|
—
|
|
December 2016
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
840,842
|
|
|
$
|
840,842
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
14,774
|
|
|
14,774
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
103,340
|
|
|
—
|
|
|
103,340
|
|
|
—
|
|
Investment securities
|
196,738
|
|
|
179,673
|
|
|
17,065
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
25,574
|
|
|
—
|
|
|
25,574
|
|
|
—
|
|
Deferred compensation
|
232,214
|
|
|
—
|
|
|
232,214
|
|
|
—
|
|
|
|
(a)
|
There were
no
transfers among the levels within the fair value hierarchy during the first nine months of
2017
or the year ended
December 2016
.
|
VF’s cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of forward foreign currency exchange contracts, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies, and
considers the credit risk of the Company and its counterparties. Investment securities are held in VF’s deferred compensation plans as an economic hedge of the related deferred compensation liabilities. These investments are classified as trading securities and primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets and a separately managed fixed-income fund (Level 2) with underlying investments that are valued based on quoted prices for similar assets in active markets or quoted prices in inactive markets for identical assets. Liabilities related to VF’s deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments.
All other financial assets and financial liabilities are recorded in the consolidated financial statements at cost, except life insurance contracts which are recorded at cash surrender value. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At
September 2017
and
December 2016
, their carrying values approximated their fair values. Additionally, at
September 2017
and
December 2016
, the carrying values of VF’s long-term debt, including the current portion, were
$2,398.1 million
and
$2,292.9 million
, respectively, compared with fair values of
$2,614.6 million
and
$2,486.6 million
at those respective dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property, plant and equipment, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill and indefinite-lived intangible assets. In the event an impairment is required, the asset is adjusted to estimated fair value, using market-based assumptions.
The Company recorded
$8.6 million
of fixed asset impairments in the third quarter and first nine months of 2017, and the charges are recorded in the selling, general and administrative expenses line item in the Consolidated Statements of Income. There were
no
significant impairment charges related to property, plant and equipment in the third quarter and first nine months of 2016.
Subsequent to our annual impairment testing completed in the fourth quarter of 2016, the Company continued to monitor the actual performance of the
Nautica
®
brand reporting unit and determined that there were no triggering events in the first and second quarters of fiscal 2017. On August 26, 2017, management commenced a strategic assessment of the
Nautica
®
brand which was considered a triggering event for the reporting unit and trademark intangible asset.
The
Nautica
®
brand was acquired in 2003 and sells sportswear in the U.S. through department stores, specialty stores, VF-operated stores and online. It also has significant global licensing arrangements. The
Nautica
®
brand is part of the Sportswear coalition and represents substantially all of the coalition’s goodwill value. As part of the 2009 annual impairment analysis,VF recorded an impairment charge of
$58.5 million
to write the goodwill down to its estimated fair value. The remaining book values of the goodwill and trademark intangible asset at the 2017 testing date were
$153.7 million
and
$217.4 million
, respectively.
The impairment testing of goodwill and the trademark intangible asset utilized significant unobservable inputs (Level 3) to determine the estimated fair value. As a result of the interim impairment testing performed, VF recognized a goodwill impairment charge of
$104.7 million
in the Consolidated Statements of Income for the three and nine months ended September 2017. VF early adopted the recently issued accounting guidance that simplifies the subsequent measurement of goodwill and calculated the impairment charge as the difference between the carrying value of the reporting unit and the estimated fair value. The estimated fair value of the trademark intangible asset exceeded its carrying value by a substantial amount and thus the asset was not impaired.
The estimated fair value of the
Nautica
®
reporting unit for goodwill impairment testing was determined using a combination of two valuation methods: an income approach and a market approach. The income approach was based on projected future (debt-free) cash flows that were discounted to present value and assumed a terminal growth value. The discount rate was based on the reporting unit’s weighted average cost of capital (“WACC”) that takes market participant assumptions into consideration. For the market approach, management used both the guideline company and similar transaction methods. The guideline company method analyzed market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. The market multiples used in the valuation were based on the relative strengths and weaknesses of the reporting unit compared to the selected guideline companies. Under the similar transactions method, valuation multiples were calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.
Management used the income-based relief-from-royalty method to value the
Nautica
®
trademark intangible asset. Under this method, revenues expected to be generated by the trademark were multiplied by a selected royalty rate. The royalty rate was selected based on consideration of i) royalty rates included in active license agreements, ii) royalty rates received by market participants in the apparel industry, and iii) the current performance of the reporting unit. The estimated after-tax royalty revenue
stream was then discounted to present value using the reporting unit’s WACC plus a spread that factors in the risk of the intangible asset.
Management’s revenue and profitability forecasts used in the
Nautica
®
reporting unit and intangible asset valuations considered recent and historical
Nautica
®
performance, strategic initiatives for the
Nautica
®
reporting unit and industry trends. Assumptions used in the valuations were similar to those that would be used by market participants performing independent valuations of these businesses.
Key assumptions developed by VF management and used in the quantitative analysis include:
|
|
•
|
Near-term revenue declines with later-term improvements over the projection period.
|
|
|
•
|
Improved profitability over the projection period, trending consistent with revenues.
|
|
|
•
|
Royalty rates based on active license agreements of the brand.
|
|
|
•
|
Market-based discount rates.
|
It is possible VF’s conclusions regarding impairment of the
Nautica
®
reporting unit goodwill or trademark intangible asset could change in future periods. There can be no assurance the estimates and assumptions used in our goodwill and intangible asset impairment testing performed in the third quarter of 2017 will prove to be accurate predictions of the future. For example, variations in our assumptions related to discount rates, comparable company market approach inputs, business performance and execution of planned growth strategies could impact future conclusions. A future impairment charge for goodwill or intangible assets could have a material effect on VF’s consolidated financial position and results of operations.
Note O – Derivative Financial Instruments and Hedging Activities
Summary of Derivative Financial Instruments
All of VF’s outstanding derivative financial instruments are forward foreign currency exchange contracts. Although derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, a limited number of derivative contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. The notional amounts of outstanding derivative contracts were
$2.4 billion
at
September 2017
, and
$2.2 billion
at both
December 2016
and
September 2016
, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Swedish krona, Japanese yen, Polish zloty and Turkish lira. Derivative contracts have maturities up to
20 months
.
The following table presents outstanding derivatives on an individual contract basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivatives
with Unrealized Gains
|
|
Fair Value of Derivatives
with Unrealized Losses
|
In thousands
|
September 2017
|
|
December 2016
|
|
September 2016
|
|
September 2017
|
|
December 2016
|
|
September 2016
|
Foreign currency exchange contracts designated as hedging instruments
|
$
|
26,451
|
|
|
$
|
103,340
|
|
|
$
|
75,497
|
|
|
$
|
(88,593
|
)
|
|
$
|
(25,292
|
)
|
|
$
|
(31,996
|
)
|
Foreign currency exchange contracts not designated as hedging instruments
|
207
|
|
|
—
|
|
|
—
|
|
|
(619
|
)
|
|
(282
|
)
|
|
(185
|
)
|
Total derivatives
|
$
|
26,658
|
|
|
$
|
103,340
|
|
|
$
|
75,497
|
|
|
$
|
(89,212
|
)
|
|
$
|
(25,574
|
)
|
|
$
|
(32,181
|
)
|
VF records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a gross basis, even though they are subject to master netting agreements. If VF were to offset and record the asset and liability balances of its forward foreign currency exchange contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Consolidated Balance Sheets would be adjusted from the current gross presentation to the net amounts as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2017
|
|
December 2016
|
|
September 2016
|
In thousands
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
|
Derivative
Asset
|
|
Derivative
Liability
|
Gross amounts presented in the Consolidated Balance Sheets
|
$
|
26,658
|
|
|
$
|
(89,212
|
)
|
|
$
|
103,340
|
|
|
$
|
(25,574
|
)
|
|
$
|
75,497
|
|
|
$
|
(32,181
|
)
|
Gross amounts not offset in the Consolidated Balance Sheets
|
(26,001
|
)
|
|
26,001
|
|
|
(22,341
|
)
|
|
22,341
|
|
|
(19,328
|
)
|
|
19,328
|
|
Net amounts
|
$
|
657
|
|
|
$
|
(63,211
|
)
|
|
$
|
80,999
|
|
|
$
|
(3,233
|
)
|
|
$
|
56,169
|
|
|
$
|
(12,853
|
)
|
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
September 2017
|
|
December 2016
|
|
September 2016
|
Other current assets
|
$
|
23,387
|
|
|
$
|
84,519
|
|
|
$
|
66,231
|
|
Accrued liabilities
|
(75,266
|
)
|
|
(18,574
|
)
|
|
(28,852
|
)
|
Other assets
|
3,271
|
|
|
18,821
|
|
|
9,266
|
|
Other liabilities
|
(13,946
|
)
|
|
(7,000
|
)
|
|
(3,329
|
)
|
Cash Flow Hedges
VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs, operating costs and intercompany royalties. The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Gain (Loss) on Derivatives
Recognized in OCI
Three Months Ended September
|
|
Gain (Loss) on Derivatives
Recognized in OCI
Nine Months Ended September
|
Cash Flow Hedging Relationships
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency exchange
|
$
|
(51,147
|
)
|
|
$
|
9,571
|
|
|
$
|
(117,580
|
)
|
|
$
|
32,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Gain (Loss) Reclassified from
Accumulated OCI into Income
Three Months Ended September
|
|
Gain (Loss) Reclassified from
Accumulated OCI into Income
Nine Months Ended September
|
Location of Gain (Loss)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
$
|
11,614
|
|
|
$
|
14,676
|
|
|
$
|
25,074
|
|
|
$
|
11,997
|
|
Cost of goods sold
|
(4,164
|
)
|
|
15,485
|
|
|
12,763
|
|
|
80,094
|
|
Selling, general and administrative expenses
|
(882
|
)
|
|
(1,098
|
)
|
|
(1,212
|
)
|
|
(3,611
|
)
|
Other income (expense), net
|
(774
|
)
|
|
526
|
|
|
(688
|
)
|
|
2,653
|
|
Interest expense
|
(1,185
|
)
|
|
(1,131
|
)
|
|
(3,518
|
)
|
|
(3,356
|
)
|
Total
|
$
|
4,609
|
|
|
$
|
28,458
|
|
|
$
|
32,419
|
|
|
$
|
87,777
|
|
Derivative Contracts Not Designated as Hedges
VF uses derivative contracts to manage foreign currency exchange risk on third-party accounts receivable and payable, as well as intercompany borrowings. These contracts are not designated as hedges and are recorded at fair value in the Consolidated Balance Sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net transaction gains or losses on the related assets and liabilities. Following is a summary of these derivatives included in VF’s Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
Derivatives Not Designated as Hedges
|
|
Location of Gain (Loss)
on Derivatives
Recognized in Income
|
|
Gain (Loss) on Derivatives
Recognized in Income
Three Months Ended September
|
|
Gain (Loss) on Derivatives
Recognized in Income
Nine Months Ended September
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency exchange
|
|
Cost of goods sold
|
|
$
|
(927
|
)
|
|
$
|
(510
|
)
|
|
$
|
(294
|
)
|
|
$
|
225
|
|
Foreign currency exchange
|
|
Other income (expense), net
|
|
(339
|
)
|
|
(110
|
)
|
|
(2,078
|
)
|
|
(1,196
|
)
|
Total
|
|
|
|
$
|
(1,266
|
)
|
|
$
|
(620
|
)
|
|
$
|
(2,372
|
)
|
|
$
|
(971
|
)
|
Other Derivative Information
There were
no
significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the
three and nine
-month periods ended
September 2017
and
September 2016
.
At
September 2017
, accumulated OCI included
$42.8 million
of pre-tax net deferred losses for foreign currency exchange contracts that are expected to be reclassified to earnings during the next
12 months
. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.
VF entered into interest rate swap derivative contracts in 2011 and 2003 to hedge the interest rate risk for issuance of long-term debt due in
2021
and
2033
, respectively. In each case, the contracts were terminated concurrent with the issuance of the debt, and the realized gain or loss was deferred in accumulated OCI. The remaining pre-tax net deferred loss in accumulated OCI was
$19.2 million
at
September 2017
, which will be reclassified into interest expense in the Consolidated Statements of Income over the
remaining terms of the associated debt instruments. VF reclassified
$1.2 million
and
$3.5 million
of net deferred losses from accumulated OCI into interest expense for the
three and nine
-month periods ended
September 2017
, respectively, and
$1.1 million
and
$3.4 million
for the
three and nine
-month periods ended
September 2016
, respectively. VF expects to reclassify
$4.9 million
to interest expense during the next
12 months
.
Net Investment Hedge
The Company has designated its
€850.0 million
of euro-denominated fixed-rate notes as a net investment hedge of VF’s investment in certain foreign operations. Because this debt qualified as a nonderivative hedging instrument, foreign currency transaction gains or losses of the debt are deferred in the foreign currency translation and other component of accumulated OCI as an offset to the foreign currency translation adjustments on the hedged investments. The net investment hedge was initiated in September 2016 and there were
no
significant amounts recognized in accumulated OCI during the third quarter of 2016. During the
three and nine
-month periods ended
September 2017
, the Company recognized an after-tax loss of
$20.4 million
and
$65.5 million
, respectively, in OCI related to the net investment hedge. Any amounts deferred in accumulated OCI will remain until the hedged investment is sold or substantially liquidated. The Company recorded
no
ineffectiveness from its net investment hedge during the
three and nine
-month periods ended
September 2017
and the three and nine-month periods ended September 2016.
Note P – Recently Adopted and Issued Accounting Standards
Recently Adopted Accounting Standards
In July 2015, the FASB issued an update to their accounting guidance related to inventory that changes the measurement principle from lower of cost or market to lower of cost or net realizable value. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on equity method accounting. The guidance eliminates the requirement to retroactively apply the equity method when an entity obtains significant influence over a previously held investment. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on derivative financial instruments when there is a change in the counterparty to a derivative contract (novation). The new guidance clarifies that the novation of a derivative contract that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship, provided that all other hedge accounting criteria continue to be met. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In March 2016, the FASB issued an update to their accounting guidance on derivative financial instruments that clarifies the steps required to determine bifurcation of an embedded derivative. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In October 2016, the FASB issued an update to their accounting guidance on the recognition of current and deferred income taxes for intra-entity asset transfers. The new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company early adopted this guidance in the first quarter of 2017 using the modified retrospective method, which requires a cumulative adjustment to retained earnings as of the beginning of the period of adoption. The cumulative adjustment to the January 1, 2017 Consolidated Balance Sheet was a reduction in both the other assets and retained earnings line items of
$237.8 million
.
In October 2016, the FASB issued an update to their accounting guidance that changes how a single decision maker will consider its indirect interests when performing the primary beneficiary analysis under the variable interest entity model. This guidance became effective in the first quarter of 2017, but did not impact VF’s consolidated financial statements.
In November 2016, the FASB issued an update that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The Company early adopted this guidance in the first quarter of 2017 on a retrospective basis and the Consolidated Statements of Cash Flows included herein reflect
$4.1 million
and
$4.4 million
of restricted cash for September 2017 and September 2016, respectively. The Company’s restricted cash is generally held as collateral for certain transactions.
In January 2017, the FASB issued an update that simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. The single quantitative step test requires companies to compare the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit. VF will continue to have the option of first performing a qualitative assessment to determine whether it is necessary to complete the quantitative goodwill impairment test. The Company
early adopted this guidance in the third quarter of 2017 by applying the single quantitative step test to our interim goodwill impairment analysis and recorded an impairment charge of
$104.7 million
.
Recently Issued Accounting Standards
In May 2014, the FASB issued a new accounting standard on revenue recognition that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. The standard prescribes a five-step approach to revenue recognition: (1) identify the contracts with the customer; (2) identify the separate performance obligations in the contracts; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when, or as, each performance obligation is satisfied. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. A cross-functional implementation team has completed VF’s impact analysis and is commencing the disclosure assessment phase of the project. The new guidance is not expected to have a material impact on VF’s significant revenue streams within the wholesale, direct-to-consumer and royalty channels. VF is in the process of concluding on the impact on less significant revenue streams within those channels. The Company expects to adopt the new standard utilizing the modified retrospective method in the first quarter of fiscal 2019.
In January 2016, the FASB issued an update to their accounting guidance related to the recognition and measurement of certain financial instruments. This guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In February 2016, the FASB issued a new accounting standard on leasing. This new standard will require companies to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. The Company has formed a cross-functional implementation team to address the standard and has started the design and assessment phase of the project. This guidance will be effective for VF in the first quarter of fiscal 2020 with early adoption permitted. The standard requires use of the modified retrospective transition approach. Given the Company’s significant number of leases, VF expects this standard will have a material impact on VF’s Consolidated Balance Sheets but does not expect it to have a material impact on the Consolidated Statements of Income. The Company expects to adopt the new standard in the first quarter of fiscal 2020.
In March 2016, the FASB issued an update to their accounting guidance on extinguishments of financial liabilities that exempts prepaid stored-value products, or gift cards, from the existing guidance. The updated guidance requires that gift card liabilities be subject to breakage accounting, consistent with the new revenue recognition standard discussed above. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In June 2016, the FASB issued an update to their accounting guidance on the measurement of credit losses on financial instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. This guidance will be effective for VF in the first quarter of fiscal 2021 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.
In August 2016, the FASB issued an update to their accounting guidance addressing how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on VF’s consolidated financial statements.
In January 2017, the FASB issued an update that provides a more narrow framework to be used in evaluating whether a set of assets and activities constitutes a business. This guidance will be effective for VF in the first quarter of fiscal 2019 with early adoption permitted. The Company will apply this guidance to any transactions after adoption but does not expect it to have a significant impact on VF’s consolidated financial statements.
In March 2017, the FASB issued an update which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest cost, expected return on plan assets, amortization of prior service costs or credits and actuarial gains and losses) separately and outside of operating income. The amendments in this update specify that only the service cost component is eligible for capitalization, which is consistent with VF’s current practice. The presentation change in the Consolidated Statements of Income will be applied on a retrospective
basis. This guidance will be effective for VF beginning in the first quarter of fiscal 2019. Upon adoption, VF will reclassify the other components of net periodic benefit costs from the selling, general and administrative expenses line item in the Consolidated Statements of Income. Except for the reclassification within the Consolidated Statements of Income noted above, the Company does not expect the adoption of this accounting guidance to have a significant impact on VF’s consolidated financial statements.
In May 2017, the FASB issued an update that amends the scope of modification accounting for share-based payment arrangements. This update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. This guidance will be effective for VF beginning in the first quarter of fiscal 2019 with early adoption permitted. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company will apply this guidance to any future changes made to the terms or conditions of share-based payment awards after adoption but does not expect it to have a significant impact on VF’s consolidated financial statements.
In August 2017, the FASB issued an update that amends and simplifies certain aspects of hedge accounting rules to better portray the economic results of risk management activities in the financial statements. This guidance will be effective for VF in the first quarter of fiscal 2020 with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on VF’s consolidated financial statements.
Note Q — Restructuring
In the fourth quarter of 2016, VF leadership approved restructuring charges related to cost alignment initiatives, and recognized
$58.1 million
of restructuring charges. The Company did not recognize additional costs associated with these actions in the first nine months of 2017 and does not expect to recognize significant additional costs relating to these actions for the remainder of 2017. The Company expects a substantial amount of the restructuring activities to be completed by the end of 2017.
The activity in the restructuring accrual for the nine-month period ended September 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Severance
|
|
Other
|
|
Total
|
Amounts recorded in accrued liabilities at December 2016
|
$
|
52,720
|
|
|
$
|
878
|
|
|
$
|
53,598
|
|
Cash payments
|
(24,515
|
)
|
|
(878
|
)
|
|
(25,393
|
)
|
Adjustments to accruals
|
(3,001
|
)
|
|
—
|
|
|
(3,001
|
)
|
Currency translation
|
824
|
|
|
—
|
|
|
824
|
|
Amounts recorded in accrued liabilities at September 2017
|
$
|
26,028
|
|
|
$
|
—
|
|
|
$
|
26,028
|
|
Note R – Subsequent Events
On October 2, 2017, VF completed the acquisition of Williamson-Dickie for
$800.7 million
in cash, subject to working capital and other adjustments. Refer to Note B for additional information.
On
October 19, 2017
, VF’s Board of Directors declared a quarterly cash dividend of
$0.46
per share, payable on
December 18, 2017
to stockholders of record on
December 8, 2017
.
On November 1, 2017, VF repaid
$250.0 million
of
5.95%
fixed-rate notes in accordance with the terms of the notes.
On November 1, 2017, VF entered into a definitive agreement to acquire
100%
of the stock of Icebreaker Holdings, Ltd., a privately held company based in Auckland, New Zealand. The transaction is expected to close in April 2018, and the purchase price is not material to VF.